Question 12.5: Taking the same business from Example 12.4, suppose that on ...
Taking the same business from Example 12.4, suppose that on closer analysis we find that of the expected overheads totalling $20,000 next month, $8,000 relates to machines (depreciation, maintenance, rent of the space occupied by the machines, etc.) and the rest to more general overheads. The other business details are exactly the same as before.
It makes sense for the machine-related overheads to be charged to jobs on a machine hour basis, and the remaining overheads to be charged on a direct labour hour basis. These are calculated as shown below.
Direct labour hours basis
Overhead recovery rate = $12,000/1,600 = $7.50 per direct labour hour
Machine hour basis
Overhead recovery rate = $8,000/1,000 = $8.00 per machine hour
The overheads can then be charged to jobs as follows:
|
Job 1 $ |
Job 2 $ |
|
| Direct labour hour basis | ||
| $7.50 × 800 | 6,000 | |
| $7.50 × 800 | 6,000 | |
| Machine hour basis | ||
| $8.00 × 700 | 5,600 | |
| $8.00 × 300 | 2,400 | |
| Total | $11,600 | $8,400 |
We can see from this that the total expected overheads figure of $20,000 is charged in total.